With the assistance of Bank Indonesia Liquidity Credits with low rates and soft terms, state banks were functioned as agents of development. Around 80% of the total loans came from Bank Indonesia’s coffers. Local potentials were developed so that Indonesia’s non-oil and gas exports, as well as other economically productive sectors, could be increased. The problem of supply scarcity, especially that of food and clothing, was thus tackled and more jobs could be generated.

The BI Board of Governors agreed on 14th and 15th February 2018 to hold the BI 7-day Reverse Repo Rate at 4.25%, while maintaining the Deposit Facility (DF) and Lending Facility (LF) rates at 3.50% and 5.00% respectively, effective 19th February 2018. The policy is consistent with efforts to maintain macroeconomic and financial system stability while supporting the domestic economic recovery. Bank Indonesia considers the previous steps taken to ease monetary policy adequate in terms of building domestic economic recovery momentum. Moving forward, Bank Indonesia believes that maintained economic stability will be the backbone of stronger and more sustainable economic growth. Furthermore, Bank Indonesia will continue to monitor the risks, including global risks such as growing uncertainty in the global financial markets owing to anticipation of a higher-than-expected FFR hike, coupled with the rising oil price, as well as the domestic risks linked to ongoing corporate consolidation, a sluggish bank intermediation function and inflation risk. To that end, Bank Indonesia will constantly optimise its mix of monetary, macroprudential and payment system policy to strike an optimal balance between macroeconomic and financial system stability and the current economic recovery. In addition, Bank Indonesia also strengthens policy coordination with the Government to maintain macroeconomic and financial system stability, while enhancing structural reforms.

Global economic growth is projected to accelerate in 2018, accompanied by rising international commodity prices. Stronger-than-expected economic gains in advanced and developing economies drives higher global growth. In terms of the advanced economies, increasing investment and consumption on the back of recent tax reforms will edge up the US economy. Consequently, further FFR hikes are anticipated along with the unwinding of the Federal Reserve balance sheet in response to rising inflation approaching the target corridor. Europe’s economy is projected to accelerate on improving exports and increasing consumption and accommodative monetary policy. Furthermore, growth projections in Japan have been revised upwards on robust exports, tax incentives for the corporate sector and accommodative monetary policy. Concerning the developing economies, solid economic growth in China is expected to persist as increasing demand, particularly from advanced countries, drives exports. India’s economy is starting to thrive as the effects of demonetisation and the implementation of the new tax system fade. Consequently, the promising global economic outlook will induce world trade volume and elevate international commodity prices, including oil, in 2018.

Indonesia’s economy has continued to show signs of improvement, backed by a more balanced structure. Actual GDP growth hit 5.19% (yoy) in the fourth quarter of 2017, up from 5.06% (yoy) in the previous period, which is indicative of maintained domestic economic recovery momentum. Solid economic growth is supported by a stronger structure, with investment and exports cited as the main drivers. A relatively high investment growth has reached 7.27% (yoy), pushed up by building investment for infrastructure development as well as non-building investment in anticipation of increasing future demand. Meanwhile, the global economic recovery and rising international commodity prices stimulated export growth to the tune of 8.5% (yoy). Furthermore, accelerated government spending and stable household consumption backed by controlled inflation has also catalysed national economic growth. By sector, the construction sector, transportation and warehousing as well as information and communication are the main contributors to the flourishing domestic recovery. In contrast, the manufacturing industry remains subdued despite strong performance recorded in several subsectors, including the food and beverages industry, textiles and clothing as well as base metals. Regionally, the economies of Sulawesi, Maluku and Papua have accelerated, offsetting slower growth in Java, Kalimantan and Balinusra and stable growth in Sumatra. Consequently, national economic growth in 2017 stood at 5.07% (yoy), the highest on record for the past four years. In 2018, Bank Indonesia projects the domestic economy to expand in the 5.1-5.5% (yoy) range, buoyed by investment in ongoing infrastructure projects coupled with increasing non-building investment, including private investment, specifically machinery and equipment. In addition, solid export growth is expected to continue as the global economy continues to recover and international commodity prices remain high.

The balance of payments (BOP) has recorded another surplus and the current account deficit remains under control. Indonesia’s BOP surplus in the fourth quarter of 2017 was underpinned by a significant capital and financial account surplus together with a controlled current account deficit. A surplus of direct investment and portfolio investment bolstered capital and financial account performance. On the other hand, current account deficit in the fourth quarter of 2017 was contributed by a narrower goods trade surplus and larger services trade deficit. Therefore, the BOP recorded a surplus totalling USD11.6 billion in 2017, supported by a wider capital and financial account surplus on the previous year and a reduction in the current account deficit to 1.7% of GDP. Such developments led to an increase in official reserve assets at the end of December 2017 to USD130.2 billion. In January 2018, the trade balance recorded a deficit of USD0.68 billion, yet followed by a relatively high capital inflow. The official reserve assets increased yet again in January 2018 to USD132.0 billion, representing an all time high for Indonesia. The current position of reserve assets is equivalent to 8.5 months of imports or 8.2 months of imports and servicing government external debt, which is well above the international standard of three months. Bank Indonesia projects the current account deficit in 2018 to remain under control and within a safe threshold at 2.0-2.5% of GDP in line with domestic economic improvements.

The rupiah tended to appreciate in January 2018 after defying pressures in the fourth quarter of 2017. In the fourth quarter of 2017, the rupiah depreciated by an average of 1.51% to Rp13,537 per USD, before rebounding 1.36% to Rp13,378 per USD in January 2018 as non-resident capital inflows returned in line with the promising national economic outlook and appreciation of regional currencies. In early February 2018, an increasing uncertainty in the global financial market especially related to a higher than expected FFR Rate has caused pressure on global currencies, including the rupiah. Bank Indonesia will remain vigilant of emerging global financial market uncertainty, while continuing exchange rate stabilisation measures to safeguard the currency’s fundamental value and maintain market mechanisms.

Inflation in January 2018 remained under control and within the target corridor. CPI inflation declined from 0.71% (mtm) the month earlier to 0.62% (mtm) in January 2018. Annually, CPI inflation stood at 3.25% (yoy), which is consistent with the inflation target for 2018 at 3.5±1%. The manageable inflation stemmed from core inflation, which was controlled in line with Bank Indonesia’s policy to consistently maintain exchange rate stability and anchor inflation expectations. In addition, Administered Prices deflation, as transportation tariffs normalised after the holiday season, was also a considerable drag on headline inflation. Nevertheless, inflationary pressures on volatile foods increased as a result of soaring rice prices. Bank Indonesia projects inflation in 2018 within the target corridor, namely 3.5±1%. In addition, policy coordination between Bank Indonesia and the Government to control inflation will constantly be strengthened in anticipation of a potential build-up of inflationary pressures, specifically from volatile foods.

The financial system remains stable despite a sluggish bank intermediation function. Maintained financial system stability is reflected in the high Capital Adequacy Ratio (CAR) of the banking industry, namely 23.0%, and a liquidity ratio of 21.5% in December 2017. Meanwhile, congruent with efforts to enhance credit risk management in the banking industry, the ratio of non-performing loans (NPL) has improved, decreasing to 2.6% (gross) or 1.2% (net) at the end of 2017. Monetary and macroprudential policy easing was successfully transmitted through the interest rate channel, as demonstrated by the banks’ propensity to reduce deposit and lending rates by 65bps and 74bps respectively from January – December 2017. Notwithstanding, transmission through the credit channel remained ineffective due to weak demand for new loans combined with selective bank lending. Credit growth in 2017 was recorded at 8.2% (yoy), up from 7.9% (yoy) the year earlier. Despite restrained credit growth, economic financing through the capital market, including initial public offerings (IPO) and rights issues, corporate bond issuances and medium-term notes (MTN), has continued to increase, expanding by 29.8% in 2017, in line with the financial deepening program. Meanwhile, deposit growth was recorded at 9.4% (yoy) in 2017, down slightly from 9.6% (yoy) in 2016. With the expected economic recovery and progress in terms of corporate and banking sector consolidation, Bank Indonesia predicts stronger credit and deposit growth in 2018, improving respectively to 10-12% (yoy) and 9-11% (yoy). Moving forward, in order to optimise monetary and macroprudential policy transmission, Bank Indonesia will continue to coordinate with respective authorities.